Public Finance

Case: “Rovna Dan: The Flat Tax in Slovakia”, Harvard Business School case no. 9-707-043, March 2010


Textbook Reading: Chapter 7 (Intro, Section 7.1 and 7.2; pp. 199-216) and Chapter 12 (Section 12.1; pp. 399-403)

When talking about macroeconomics I think it’s important to distinguish between the overall economy and the circumstances of an individual firm. We can’t always assume that macro conditions are felt the same by each company within it. I explain more in this video:

In 2011 the Mirrlees Review published ‘Tax by Design‘, a comprehensive overview of UK tax reform.

In terms of a flat tax, here is a short video asking  Would a Flat Tax Be More Fair?” There’s a good HBS article, from 2007, called “All Eyes on Slovakia’s Flat Tax”. Slovakia repealed the flat tax in 2013, which you can read about on this LSE Blog: Slovakia has abolished its flat tax rate, but other Eastern and Central European countries are likely to continue with the policy.

Here are some newspaper attempts to explain fiscal implications of tax policy:

Regarding public finance more generally, in 2012 I participated in the 2020 Tax Commission. You can read our report here.

Regarding tax compliance, you may hear things like:

Apple can pretty much choose how much tax it wants to pay and to whom. One EU estimate was that it paid less than 0.01% tax on profits of over $100 billion (Frisby 2019, p.175)

This may be true, but it doesn’t mean that tax is voluntary. The choice that Apple have is over what activities they undertake, each of which have different tax implications. So they can affect their tax obligations, but only in as much as they alter their business decisions.

Group activity: Personal Taxation, December 2020

This page ties into Chapter 7 of Economics: A Complete Guide for Business

Learning Objectives: Understand alternative types of tax regime.

Focus on diversity: Harriet Martineau (1802-1876) is best known as a pioneer of sociology, but contributed to the populising of classical economic insights on taxation.

Growth Theory

Reading: Solow, R., 1956, “A Contribution to the Theory of Economic Growth” The Quarterly Journal of Economics, 70(1):65-94
Lecture handout: Growth theory*

Textbook Reading: Chapter 7 (Section 7.4; pp. 225-227) and Chapter 12 (Section 12.1; pp. 399-403)


In the lecture I showed the dramatic transformation of Hong Kong harbour, as an example of fast economic growth.

Here is a 52 year time lapse of Kowloon peninsula:

In 1945 Hong Kong was a poor territory. After war and Japanese occupation many of its 600,000 people were starving. They had no traditionally considered natural resources, and yet soon became a major manufacturing location, the busiest port in the world, and a centre of the global financial market.

According to reasonable internet sources, Hong Kong’s GDP per capita is now bigger than the UK’s.

What happened? In 1945 civil servant John Cowperthwaite made Hong Kong a free port, which meant no tariffs for most goods, no export subsidies, and few restrictions on imports. Trade grew quickly.

On the supply side, it is not as though Hong Kong’s services lack in any way. The territory has the fourth best education system in the world, according to Pearson, and it ranks top of Bloomberg’s healthcare index. Its public transport system was ranked the world’s best last year, and it is consistently used as a model elsewhere (Frisby, 2019, p.13)

Perhaps even more powerfully, Hong Kong has been used as a model for other areas on mainland China. In 1980 Shenzhen became a “special economic zone” with low taxes and market-friendly regulation. The population rose from 30,000 to 13 million. Here’s Hong Kong in 12 amazing photos.

In 2014 I attended a Mont Pelerin Society meeting in Hong Kong. Here I am in front of that amazing skyline, with my undergraduate econ study partner!

For more see Frisby 2019, Chapter 2.

 

 

 

 

 

 

Some other nice examples of side by side growth include this view of London from Greenwich, 40 years apart:

Here is Phnom Penh, 9 years apart:

One of my favourite examples of how to notice intergenerational progress and increased material prosperity is the Vic Wilcox’s thoughts on toilets, from Davi Lodge’s ‘Nice Work’ (1988) – see here.

Here is an introduction to the Solow model (more videos in the series are here)

Growth is like an iPhone:

See my Country competitiveness Dashboard.

Here is Tyler Cowen’s claim that economic growth is a moral imperative (which is based on his book, Stubborn Attachments):

Consider this photo of Nik Wallenda, cycling across a tightrope:

  • The Solow model shows how he remains balanced (investment and depreciation delivers k*)
  • But any forward movement is exogenous (i.e. technology, population changes)
  • Endogenous growth theory adds some rocket boosters!
Learning Objectives: Understand the foundations of economic growth. See how economic growth theories inform development economics. 

Cutting edge theory: This session defines cutting edge growth 

Focus on diversity: One of the most widely respected economic historians of the factors that led to industrialisation is Deidre McCloskey

Spotlight on sustainability: This session defines the sustainable growth rate as the balanced path between capital accumulation and capital consumption.

Market-Based Management (R)

Reading: Finegan, J., “Pipe Dreams” Inc.com Magazine, August 1994
Instructor’s resource: MBM Dimensions
Further activity:

Additional reading:

Learning Objectives: Understand and apply Market-Based Management

Corporate Entrepreneurship

Case: Weston, Hilary A., 2000, “Automation Consulting Services”, Harvard Business School Case No. 9-190-053

The following discussion questions can be used:

Instructor’s resource:

Learning Objectives: Understand organisational control mechanisms.

Focus on diversity: Hilary A. Weston was one of the co-authors of the ACS case. 

Prediction Markets

Case: Coles, Peter, Lakhani, Karim and McAfee, Andrew, “Prediction Markets at Google” Harvard Business School Case No. 9-607-088, August 20, 2007

Case preparation: Prediction Markets”, February 2016

Textbook Reading: Chapter 4 (Section 4.5; pp. 127-134)

I am an academic not an entrepreneur, but if there’s one area that I think is ripe for a successful venture it’s creating the go to prediction market. By the early 2000s we had established that prediction markets were an effective tool for corporate management, and we also learnt how useful they could be for a broad range of policy issues. It’s a scandal that governments – and the US in particular – have been so opposed to their use. (The reason is that they’re treated either as gambling firms or futures traders which are two of the most targeted and heavily regulated and industries). According to Scott Alexander:

There ought to be a billion dollar prediction market, maybe a ten billion dollar one. Smart VCs clearly believe something like this, or Kalshi wouldn’t have gotten $30 million+ in investment. Sometimes people who incorrectly believe I know things about prediction markets ask me if know the missing secret sauce. I don’t think there’s any secret. A prediction market will strike it big when it gets three things right at the same time:

    • Real money
    • Easy to use
    • Easy to create your own subsidized markets

It’s a dream of mine that I may have students who manage to put those things together, solve the regulatory issues, and launch a killer app. So far the closest is probably Polymarket.

To read more about the “Policy Analysis Market” (PAM) which was designed by Robin Hanson as a tool for the US Department of Defense, but got cancelled in July 29th 2003 having been described as a “terrorism futures market” by the Washington Post, see:

Recommended reading
Recommended video

Recommended audio

Why There Aren’t So Many Hotel Fires Anymore” Stuff You Should Know.

Points to consider:

    • Key technology = fire doors, sprinklers, and alarms that anyone can set off. Imagine how many major hotel fires would occur if staff had to wait to inform senior management before receiving authorisation to call the fire brigade.
Learning Objectives: Understand how to operate a prediction market.

 

Internal markets

Case: Wessen, R.R. and Porter, D., “The Cassini Resource Exchange” Ask Magazine 16, Fall 2007, p. 14-18

Textbook Reading: Chapter 4 (Section 4.5; pp. 127-134)

Here is a lecture video on the internal knowledge problem:

Watch Cassini’s grand finale:

Learning Objectives: Think creatively about how to use markets within organisations

Signalling

Reading: Spence, M., 1973, “Job Market Signaling”. Quarterly Journal of Economics 87(3):355–374
Lecture handout: Signalling*

Textbook Reading: Chapter 3 (Section 3.4; pp. 90-96)

Here’s a lecture video providing an example of the model.

This debate considers the extent to which higher education is merely signalling:

Here’s my treatment of signalling and countersignalling:

In “What toffs and plebs share“, Ed West uses the signalling vs. counter signalling distinction to argue that institutions such as horse racing or the army demonstrate a unity of peasant culture and aristocracy. He identifies a U-curve of social patterns, with those in the middle trying hard to distinguish themselves from those below, even though this reduces their ability to mix with those at the top.

Learning Objectives: Understand the returns to education

Focus on diversity: Claudia Goldin is a world leading labour economist, a former president of the American Economic Association, and co-author of a highly influential book on the earnings gap between high skilled and low skilled workers. She is also a pioneer for studying the role of women in the economy.

Adverse Selection

Reading: Akerlof, G.A., 1970, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism“. Quarterly Journal of Economics 84(3):488–500 (£)

Textbook Reading: Chapter 3 (Section 3.4; pp. 90-96)

Group activity:

  • If you are a bit daunted by an academic article, George Akerlof wrote a very interesting essay on how he came up with the ideas and the process of working on the topic. You can read it at the Nobel site.
  • Further reading: Secrets and agents“, The Economist, July 23rd 2016

Here’s a good video explaining the lemons problem:

Learning Objectives: Think critically about the role of asymmetric information on market performance

Cutting edge theory: Product heterogeneity and customisation

Focus on diversity: Amy Finkelstein, of MIT, was featured by The Economists 2008 list of emerging economists for her work on asymmetric information in health insurance. She won the John Bates Clark medal in 2012.

Spotlight on sustainability: Importance of long term reputational effects of short term strategic choices

Capital Theory

Lecture handout: Capital theory*

Textbook Reading: Chapter 6

There is still a website containing the “Millennium Dome Collection”, but this Guardian article provides a thorough retrospective.

Here is the video of the Sinclair C5 Infomercial:

Here is a lovely list of repurposed American gas stations.

For more on business plan ecology, see

Learning Objectives: To understand what capital goods are

Spotlight on sustainability: Look at instances where resources have been reconfigured for alternate uses

Auctions

Case: Hild, M., Dwidevy, A., and Raj, A., 2004, “The Biggest Auction Ever: 3G Licensing in Western Europe”, Darden Business Publishing

Discussion question: What are the alternatives to auctions?

Textbook Reading: Chapter 3 (Intro and Section 3.3; pp. 65-67 and pp.83-89) and Chapter 12 (Section 12.4; pp. 434-437

In October 2020 Paul Milgrom and Robert Wilson were awarded a Nobel prize for their work on auction theory and design. Tim Harford provided a neat overview of their contribution in the Financial Times. As he says,

A well-designed auction forces bidders to reveal the truth about their own estimate of the prize’s value. At the same time, the auction shares that information with the other bidders. And it sets the price accordingly. It is quite a trick.

In this lecture video Tim Roughgarden “provides a detailed case study of the 2016-2017 Federal Communications Commission incentive auction for repurposing wireless spectrum”. It demonstrates how economics, computer science and business can coincide to solve complete real world problems.

Consider the following video:

Having read the 3G case,

  • Is there evidence of the Coase theorem in the 3G case?
  • Is there evidence of the Transitional Gains Trap in the 3G case?
Instructor resource: The Biggest Auction Ever: What Happened Next?, February 2019

Here’s more detail on spectrum auctions:

To see my guided tour of the Dutch flower auction in Aalsmeer, see here: https://anthonyjevans.com/aalsmeer/

Recommended reading:
Recommended audtio:

A great podcast on auctions is “Auction Fever” from Planet Money.

    • Discussion points:
      – Anchoring heuristic
      – Starts with a Dutch auction then turns to English one
      – Info asymmetry is reduced by testing
Learning Objectives: To consider how auctions compare to other allocation mechanisms. To understand different types of auction and apply them to real examples.

Cutting edge theory: Auctions are used in e-commerce

Focus on diversity: An expert on applied auction formats, Susan Athey was the first female winner of the John Bates Clark medal. She has been an advisor to Microsoft and you can follow her on Twitter here

Spotlight on sustainability: How governments can use beauty contests to mitigate the environmental impact of infrastructure spending